Last week, Newell Rubbermaid (NYSE:NWL) announced its plan to acquire fellow consumer-products conglomerate Jarden (UNKNOWN:JAH.DL). Already quite high-profile players in the industry, the two companies are preparing the new, combined entity to step up to the big leagues.
In this video segment, Motley Fool analysts Sean O'Reilly and Vincent Shen talk about what the buyout means for shareholders, how the rumors of a tie-up affected the two stocks prior to the announcement, how well the CEO of Jarden has done in this deal, and how Newell Brands might leverage its stronger presence in the coming years.
A full transcript follows the video.
This podcast was recorded on Dec. 15, 2015.
Sean O'Reilly: So, you and I are in Alexandria, Va., not working at the intersection of Broad and Wall. We're not super in the know, but we're pretty on the up and up, and this came out of nowhere. Was there a run-up to the deal that we maybe missed? Were they talking for a while?
Vincent Shen: Sure. There were some rumors, and it's actually interesting how the whole thing came about. I think it was [Martin] Franklin who said, the founder of Jarden, he was introduced by, I think a banker or something, at an investing conference, to the CEO, I believe, of Newell Rubbermaid, and that's when it started. It was as recently as September.
O'Reilly: Wait, they're all having drinks and it's like, "Hey, you should buy him!"
Shen: Well, they were introduced to each other, I think, as recently as September, and those talks must have developed very quickly. And the rumors for this deal -- they were actually reported by, I think, The Wall Street Journal about a week ago. So, on these initial reports that this potential merger was happening, Newell Rubbermaid shares traded up about 7.4%, Jarden shares similarly gained about 3.7%, and then obviously, yesterday, the deal was officially announced by the two companies.
Total equity value is about $13 billion. Other key terms in terms of the payment -- each Jarden shareholder will receive 0.862 Newell Rubbermaid shares and $21 cash for each Jarden share they own. Once the deal closes, Newell Rubbermaid will own about approximately 55% of the combined company. The new entity is going to be called Newell Brands, nice and simple, and it'll be led by the current Newell Rubbermaid CEO, Michael Polk, who I mentioned was, I believe, the guy who was introduced to Franklin not too long ago, and they came together on this.
O'Reilly: Is Mr. Franklin sticking around in any capacity?
Shen: He will be joining the board of directors.
O'Reilly: He's getting a lot of shares, I imagine.
Shen: He currently is no longer a CEO at Jarden, but he's still involved, and he'll be joining the board of directors, along with two other Jarden current executives. So, Newell brands, they mentioned in the press release that they want to leverage, the new large size, the new scale they have once they're combined to increase their presence with retailers, increase their presence across geographic markets, improve their distribution, their cross-selling, their marketing capabilities. I see a lot of those possibilities there. A lot of those complementary brands, product offerings that they have.
They also touted about $500 million in cost synergies expected to be realized over the next four years. If all of those synergies come to fruition, this new company, Newell Brands, will enjoy about $3 billion in annual adjusted EBITDA. Large, very large.
Shen: Sixteen billion dollars of revenue. Big, big name in the consumer-products space, for sure. So, talking a little also about the deal value and the premium, how well Jarden shareholders are coming out of this, because the rumors came out about a week in advance, stocks have been a little volatile since then.
But, basing the buyout price on the most recent closing price, so, for yesterday, Jarden shareholders are getting about $57.33 per share value, and that's about a 19% premium to where they were trading pre-buyout-rumors. So, a little over a week ago. And then, if you look based solely on their pre-rumor levels, Jarden shareholders are getting about $59.64 per share, about a 23% premium. Jarden was actually also trading just over 15 times forward earnings, with analysts forecasting about 10% earnings growth over the next five years.
So, an almost 25% premium, that's not too bad for a company showing that has logged 10% growth over the past five years and is expected to continue that rate. Like I mentioned, some of the complementary offerings, they have a ton of brands that will work with each other, and that they'll be able to cross-sell. Kitchen, baby products, outdoor products.
Going back and rounding this out, on that discussion about Michael Franklin and his payout, The Wall Street Journal reported that he's expected to gain as much as $500 million from this year.
O'Reilly: It's good to be him.
Shen: That includes a significant portion from his ownership in Jarden, and what he's getting as a result with the cash and stock combination. But there's also some interesting details from his existing employment contract, there's some clause that says if it's not renewed within two years or something along those lines, he also gets another $130 million in stock and cash and other benefits.
Shen: On top of that, the Journal also reported something about he has the option to purchase the company planes at their financial-statement price. So, you can depreciate that as an asset. So, after just a few years, its value gets appreciated very quickly. So, he might be able to get those for pennies on the dollar compared to what the actual market value is. So, it's just another interesting tidbit for how the founder of Jarden is cashing out here. But overall --
O'Reilly: It sounds like a fair deal for most parties.
Shen: He's done an incredible job. This company, since 2001, has done an amazing job building up its business. Its revenue, for this year, I think actually surpasses that of Newell Rubbermaid. But Rubbermaid has the bigger market capitalization, so it can be seen as the buyer. But overall, I'd consider this more of a merger of equals than anything else.
Sean O'Reilly has no position in any stocks mentioned. Vincent Shen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.